Mortgage Debt Has Advantages – Tax Advantages

The first time you buy a home, you may break into a cold sweat when you go to sign the loan documents and realize you are committing to paying back hundreds of thousands of dollars.
Mortgage Debt Has Advantages – Tax Advantages
Although having a mortgage is not what any homeowner wants, no one wants to be in debt, there are certain advantages of having a mortgage. First of all, not only does it allow a person to own a home of their own, but it always carries tax advantages. A mortgage is one of the biggest write-off’s available.
Everyone looks for ways to save on their taxes. After all, only two things are certain in life, death and taxes, and the less the taxes are the better. A mortgage, although this means you are in debt and are paying interest, allows people to use the interest paid on their mortgage as a tax write-off. Simply put, it can save a homeowner with a mortgage thousands of dollars in taxes.
This works by first calculating the amount paid in mortgage interest over the year. Once you have this number, you can use it on your 1040 income tax form as a deduction. That’s right, every dollar paid in interest on the mortgage is a deduction and can lower your gross income. By lowering the gross income, not only does it mean you can reach a lower tax bracket and pay a smaller tax rate, but you’ll also have a considerably smaller tax amount due in the first place based on that lower gross income.
As can be seen, the tax benefits of a mortgage are one of the benefits of having a mortgage in the first place. Although simply owning a home in the first place is the biggest plus, the tax benefits are a nice addition to that. They are an incentive that many people reluctant to look into a home and mortgages should consider. After all, you will be happy down the line when you have built up a healthy amount of equity.

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Interest-Only Or 50 Year Mortgages - Do They Really Make Sense?

With hotspots like Las Vegas, much of California and Florida still enjoying a good real estate market, many banks and mortgage companies are now spreading out payments over 50 years to make them more affordable. Prior to these 50-year mortgages, interest-only mortgages were promoted and sold as the way to go. The real question here is which is better?

Let’s first digress on what an interest-only mortgage is. Interest-only home loans or mortgages aren’t as a general rule permanently interest-only. The bank or mortgage company will normally offer the borrower 2 to 5 years at interest-only; after that they must start paying off the principle. During this time, the principle has grown. A great many borrowers may find themselves unable to pay the higher payments that come at the end of this interest-only period.  In this case, interest-only loans are similar to ARMs, and have similar default and foreclosure rates (higher than for regular fixed mortgages where the payment stays the same throughout).

The 50-year mortgage simply spreads your payments out over a longer time period and greatly increases the amount of interest you will payback; this also tends to reduce your build-up of equity.  Alex Diaz Jr., Vice President of Statewide Bancorp in Rancho Cucamonga, stated that “the 50-year mortgage has particular appeal in California because prices are higher than the rest of the country. The 30-year fixed mortgage is great, but with gas prices so high, people we're dealing with are concerned about making prices work, and the 50-year mortgage is something they're starting to consider."  The real estate market has grown by leaps and bounds in California with the average home selling in excess of $300,000.

The 50-year mortgage was designed to do three things. First, it makes it much easier for someone to buy a home in these high price areas. Second, it can help buffer and insulate the borrower against a housing bubble or possible localized deflation. Third, it keeps the selling prices high.  However, many so-called real estate experts will tell you that the interest-only loan does the same thing, but does it? The main problem with the interest-only loan is that it does not insulate or offer any protection for the borrower from increasing principle, negative equity (which can happen should there be a drop in housing prices), and, of course, those increasing payments when the term you agreed is over.

Keeping this in mind, plus the fact that there is only a very minor difference in initial payments (payments over the interest-only period), clearly the 50-year mortgage should be a better way to go.

If your budget allows, a good tactic to use is to make bi-monthly payments which will reduce the interest and term of the loan saving you many thousands of dollars. There are many lenders out there now offering this option to their borrowers.  As they say, the real money in real estate is made from buying low and selling high.

The problem is that in most of these hot communities, the selling price often ends up being much higher than the asking price, plus houses do not stay on the market for very long at all.  So, buying low is normally out of the question.  Just try finding a bargain foreclosure or HUD homes for sale in California, it's a little like trying to find gold in the old days.  In these hot communities, the real money is made by buying and holding for a number of years allowing for the yearly increases and returns on additions and upgrades.  Money can be made for sure, but with a uncertain future. It is really best to have a payment program set in stone – always use a fixed term and rate mortgage. You can still sell in five years or less, make money, and have the added comfort of a fixed payment.

Have an opinion or a question you would like me to answer, then write me! http://www.CarlHampton.com

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What Are Subprime Mortgage Loans?

Subprime lending refers to the extension of credit to higher-risk borrowers, a practice also commonly referred to as "B/C" or "nonconforming" credit. Loans to subprime borrowers serve communities that may have been underserved by other lenders in the past. In recent years, subprime mortgage lending has grown dramatically, with over 90% of all subprime mortgage loans made in or after 1993. By the end of 1996, the total value of outstanding subprime mortgage loans exceeded $350 billion. In 1997 alone, subprime lenders originated over $125 billion in home equity loans. Subprime loans have become a significant and growing part of the home equity market. Subprime originations constituted 11.5% of the total home equity lending market in 1996; by the first half of 1997, they had grown to 15.5% of this market. At the same time, the composition of companies involved in the subprime market is evolving. One of the dramatic changes in this market has been the growth in subprime mortgage lending by large corporations that operate nationwide.

The subprime mortgage market has flourished because such lending has been profitable, demand from borrowers has increased, and secondary market opportunities are growing. Lenders typically price subprime loans to consumers at rates of interest and fees higher than conventional loans. Higher rates and points can be appropriate where greater credit risks are involved, as is often the case with subprime loans. Critics assert, however, that the interest rates and fees charged by some subprime lenders are excessive, and much higher than necessary to cover increased risks, particularly since these loans are secured by the value of a home. Some attribute lenders' high rates on first mortgages in part to federal deregulation of certain state interest rate ceilings in 1980.

The relatively high profit margins in the subprime mortgage industry have fueled demand in the secondary market from investors seeking higher-yielding securitized assets, especially in an environment of generally low interest rates. In 1996, the subprime mortgage sector issued over $38 billion in securities, the largest increase in securitizations for any lending industry sector in that year. The secondary market's expansion has, in turn, helped to sustain growth in the industry by enabling lenders to raise funds on the open market to expand their subprime lending activities. Freddie Mac, one of the primary government-sponsored enterprises involved in the purchase of mortgages, recently announced plans to enter the secondary market in subprime loans by purchasing significant numbers of "A minus" subprime mortgages by 1998 and the higher-risk "B and C" loans by 1999.

The market for subprime loans is expected to continue growing. Credit card delinquencies are rising and personal bankruptcies are at record levels, which negatively affect borrowers' credit histories, pushing more consumers into higher risk categories. Meanwhile, consumer spending continues to be strong. Together, these factors increase the market for subprime loans. In addition, more borrowers generally may be seeking home equity loans due to the change in the tax code limiting allowable interest deductions to those on a first mortgage.

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30 Year vs. 15 Year Mortgages

Discussions of mortgages often focus on interest rates, but there is a much more basic decision to make. Should you go with a 30 year mortgage term or a 15 year mortgage term?

30 Year vs. 15 Year Mortgages

Any discussion of mortgages tends to turn on two points. How can you qualify for the most money with the lowest payment? How can you get the lowest interest rate for the mortgage? While these are two important issues, there is an addition one that people fail to consider, resulting in significant wasted money.

The term of a mortgage is extremely critical for a couple of reason. First, it sets the length of the obligation you are undertaking. Second, it defines the amount of interest you are going to pay over the life of the loan. These are huge issues when it comes to building equity.

The longer the loan, the more total interest you are going to pay. The trade off, of course, is you are going to have smaller monthly payments the farther you stretch out the obligation. While this may sound like a good goal when you first get the mortgage, it can backfire on you in the long run.

Most people focus on interest rates as a way to save money on mortgages. This is a valid approach, but playing with the length of the loan is a better way to save money. If you can cut the payments in half by going with a shorter loan, you can save huge amounts on the total interest repaid to a lender.

The decision on the term of the loan is relatively simple, but entirely dependent upon your personal situation. There is no absolutely correct choice. First, you need to determine if you can comfortably afford the higher payments that come with a shorter term loan. In general, a 15 year mortgage will have payments 20 to 25 percent higher than a 30 year loan. Of course, you will pay the loan off faster, to wit, be building equity in the home quicker.

The modern mortgage industry has a variety of different term length products. When applying for a loan, take the time to evaluate the different terms to see if you can find a loan that is perfect for your situation.

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Second Mortgages: What you Need to Know

At times in life it may be necessary to come up with a sum of cash for unexpected expenses or even expenses that you might not be able to afford without a influx of cash. In these cases a second mortgage can come in quite handy. Before taking out a second mortgage; however, you should know how they work and the advantages and disadvantages of second mortgages.

Basically a second mortgage occurs when you take out another mortgage on top of the existing mortgage on your home. This type of loan is secured with the property for collateral. Of course, the first mortgage takes precedence in the event that you default on the loan. Any funds that are left would then be applied to the second mortgage.

Many people commonly use second mortgages for such expenses as home improvements, the purchase of a second or vacation home and to consolidate other debts with a lower interest rate. Of course, you may also be able to use the proceeds of your second mortgage for other options but you should always keep in mind that you are putting your home at risk for the purchase and be sure you can justify the risk for that purpose.

One of the major disadvantages of a second mortgage is that the interest rate will usually be higher than your first mortgage. Lenders insist on higher interest rates because they understand they won’t be the first in line in the event that you default on the loan and they need to protect their assets, so they do this with higher interest rates. Of course, the rates are typically lower than what you could obtain with any other type of loan and much lower than credit cards.

You should also be aware that you’ll typically be responsible for some fairly significant closing costs on second mortgages. If you can’t pay those fees, you may not be able to work out a second mortgage on your property.

Due to the amount of risk involved you need to be absolutely sure you have no other option before taking out such a loan. After all, you are risking the loss of your home, so you should be sure you’re willing to take the risk as well as be relatively sure you can cover the additional loan payments.

If you do decide a second mortgage is the right option for you, be sure to shop around for rates before taking the first one offered to you. You may be able to get better terms or a lower interest rate by shopping around.

Always look over the terms to be sure of what you’re agreeing to pay. One of the most typical arrangements with many second mortgage lenders is to tie what is known as voluntary insurance in with your mortgage. Depending on the level of your current insurance policy, you may not need this additional coverage and cost. In addition, always make sure you know how much you’re paying for closing costs, such as application fees, points to get a lower interest rate and appraisal fees.

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The Facts About Second Mortgages

<b>Your home:</b> It's probably your biggest asset. Having a home to back you up when you need a loan is one of the greatest advantages of home ownership. In recent years, there has been a major increase in the amount of people looking to use their homes as a way to get access to extra money when they need it most. One of the best ways to do this is through a second mortgage.

A second mortgage is exactly what it says it is - <i>a loan made in addition to your first mortgage</i>, and it's based on the amount of equity you have built into your home. Many people use them to fund home renovations, to pay off credit cards, or to put a child through college. Since you've already been through the process once, the underwriting required to get a second mortgage is much simpler than it was the first time around, and the cost of the transactions involved will be significantly lower. This usually makes up for the fact that interest rates on the second mortgage are a bit higher than they were on the first one.

On a second mortgage, you will borrow a fixed sum of money against your home equity, and pay it back over a specified amount of time. The amount you borrow will be combined with the amount you still owe on your first mortgage.

It all sounds pretty simple. There are just a few things to keep in mind. First of all, don't take out a second mortgage on your home unless you've built up a fair amount of equity in the property already- that is, made payments on the original mortgage balance for a good amount of time. You may still be able to get a second mortgage if you don't have much equity, but your rates will be so much higher, and the amount you can borrow so much lower, that it will essentially be a waste of your time and money. This is one of those things that is worth waiting for.

Also, look into the other options of borrowing against the equity of your home, including a home equity loan and a home equity line of credit. All of these options allow you to borrow against your equity, but there are slight variations among them that mean one of the three may be the best option for you. It will depend, for the most part, on your particular financial standing, the amount of money you need to borrow, and the amount of home equity you currently have.

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Adjustable Rate Mortgages vs. Fixed Rate Mortgages

Buying a home can be an exciting and stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.

Two of the most common choices you’ll find in the mortgage market are adjustable rate mortgages and fixed rate mortgages. Fixed rate mortgages are the most traditional type of home mortgage, offering a fixed interest rate that does not change throughout the life of your loan. There are a number of important advantages associated with this type of mortgage. First, if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage amount will not change. You can budget the remainder of your financial obligations without worrying about a changing mortgage payment to throw things off.

An adjustable rate mortgage works differently. With this type of mortgage you may be able to obtain a lower interest rate than would normally be available with a fixed rate mortgage; however, the interest rate is not fixed. This means that your monthly mortgage rate may change as interest rates change. With such a mortgage you may not be able to regularly plan your budget due to such fluctuations. While there is usually a cap that will keep the interest rate from fluctuating too much, even a little fluctuation can be too much for some homeowners. Of course, there is also the possibility that interest rates will drop and if that is the case, because your mortgage is adjustable, your monthly payments will drop right along with the interest rate.

When deciding whether a fixed rate or adjustable rate mortgage is your best choice, you need to give thought to several factors. Ask yourself whether it is more important to be able to plan your monthly budget without wondering whether your mortgage will fluctuate or whether you would prefer to receive a lower interest rate in the beginning of your mortgage.

Remember that if you decide you would like to obtain the advantages of both you do have other options available to you. For example, if you feel the interest rate offered to you on a fixed rate mortgage is too high but you want the security of not having to worry about a fluctuating interest rate you can always buy down your interest rate by purchasing points. This will mean more up front costs for your mortgage; however, it may be worth it to decrease the interest rate, especially if interest rates are currently high.

If you do elect to go with an adjustable rate mortgage make sure you understand exactly how high the rates may go as well as ensure you have enough ‘wiggle’ room in your monthly budget to cushion increases if they occur. This may help to keep you out of a tight spot and possibly losing your home due to rising interest rates.

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Interest Only Mortgages – FSA Makes Move To Protect Homeowners

Abbey recently stated that over 25% of homeowners decide to take out an interest-only mortgage. It's not hard to see why – the monthly payments are significantly less, just look at this example based on a 25 year £125,000 mortgage at 5%. The interest only mortgage will cost £525 per month - but the repayment mortgage is £735 per month – an additional £210 a month – that's a lot of money!

At the root of the issue are the first time buyers – they simply can't afford the repayment mortgage, so take the interest only option as an easier way out. However, the interest only mortgage must be accompanied by a suitable savings vehicle to cover the outstanding capital at the end of the mortgage term, and it is this that many are failing to do – as many as 37% in fact.

Now the Financial Services Authority (FSA) has stepped in, concerned that many homeowners will face a shortfall at the end of their mortgage term. It is now necessary for lenders to see firm evidence from new borrowers that they have set up a savings vehicle to cover the capital. Previously, borrowers just had to state their intention, for example, they would sell the property to raise the capital. However, that will no longer be good enough. The lender will need to see a proper plan set up – they are not allowed to set you up on an interest only mortgage without that proof. If they did, they would be going against regulations and would be penalised by the FSA.

The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings Account (ISA), or evidence that 25% tax-free cash from a personal pension plan (PPP) will ultimately cover the outstanding capital. It will no longer be good enough to say that you will set it up – you must show that you have already sorted it out!

In the short time that the new regulations have been in force, individual lenders are already making their own interpretations of the rules. The Nationwide Building Society is not allowing borrowers to use a future inheritance, or future pay rises as a basis on which to set up an interest only mortgage. Similarly, expected bonuses will not be good enough either, not unless you can prove that you will definitely be receiving them. Bonuses based on performance can't be guaranteed, so would not count.

People that already have their own home will not be subjected to the same rigorous checks however. As long as you are borrowing less than two thirds of the new property's value, and you have £150,000 of net equity in your current home, then Nationwide will accept you as a customer.

On the whole, mortgage advisers will not recommend interest only mortgages, agreeing that they represent too much risk. Repayment mortgages guarantee that all monies owed are paid at the end of the term, but a separate savings vehicle could fail to live up to expectations, and you could end up with a shortfall. Most mortgage advisers will recommend a repayment mortgage to bypass that risk.

On the other hand, the interest only mortgage is a useful short term solution, and if you can assure your mortgage adviser that you intend to switch over to a repayment mortgage as soon as you can afford to, they may well support your decision. Even in this case however, you will still need to provide the same details as if you were intending to stick with it for the full term. You simply won't be able to get an interest only mortgage without providing the right paperwork.

The best all round solution is to get an interest only mortgage that allows you to overpay. So if you find that you have some extra capital, you can put it onto your mortgage, and reduce the capital. These types of mortgage are widely available, and many allow you to repay 10% or more in a single year. Of course, if you can't afford it, then you don't have to – at least you have the choice. Just make sure, before signing up, that you can overpay without penalty.

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